The Fed will stick to a 75 basis point hike in July; 40% chance of recession

The Federal Reserve Building in Washington September 1, 2015. REUTERS/Kevin Lamarque/File Photo

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BENGALURU, July 21 (Reuters) – The U.S. Federal Reserve will opt for another 75 basis point rate hike rather than a bigger step at its meeting next week to rein in stubbornly high inflation amid the likelihood of A recession over the next year amounts to 40%, a Reuters poll of economists has found.

Inflation hit 9.1% in June, another four-decade high, fueling expectations that the Fed, which had just jumped from 50 to 75 basis points at the last meeting, would act even more aggressively and would opt for a 100 basis point hike. Read more

But some of the more hawkish Fed officials in their public remarks favored a 75 basis point hike, tempering those expectations in recent days. Last month’s 75 basis point hike was the first of this magnitude since 1994. read more

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The July 14-20 Reuters poll found that 98 of 102 economists expect the Fed to hike rates by 75 basis points by the end of the July 26-27 meeting to 2.25%-2, 50%. The other four said they expected a 100 basis point hike.

Fed funds futures are pricing only about a one-in-five chance of a full one-percentage-point rise, putting those expectations broadly in line with the poll results.

But what is already the most aggressive rate hike path in decades comes with heightened recession concerns.

Median predictions from the latest poll showed a 40% chance of a recession in the United States in the coming year, with a 50% chance of a recession occurring within two years. It was a significant improvement from 25% and 40% in a June poll.

“There seems to be an inflationary tax on the consumer and it keeps building up and taking its toll and eventually pushing the economy into a mild recession,” said Aditya Bhave, senior US economist at Bank of America Securities.

More than 90% – or 47 of 51 respondents – said any potential recession would be either mild or very mild. Only four said it would be serious.

Meanwhile, a slowdown in growth, and hopefully inflation, should force the Fed to scale back rate hikes in future meetings, according to the poll.

A strong majority expects the Fed to slow to 50 basis points in September and then only increase 25 basis points at the November and December meetings. These views have remained largely unchanged since the last poll.

More than 80% of respondents, 82 out of 102, saw the federal funds rate at 3.25%-3.50% or higher at the end of this year. There was no change to where or when the Fed would stop raising rates, at 3.50%-3.75% in the first quarter of 2023, according to the median forecast.

Nevertheless, price pressures are expected to remain elevated and above the Fed’s 2% target rate for the next few years. Inflation as measured by the consumer price index is expected to average 8.0%, 3.7% and 2.5% in 2022, 2023 and 2024 respectively.

The unemployment rate was expected to average 3.7% this year before rising to 4.0% in 2023 and 4.1% in 2024. This is still low by historical comparison and far from the highs seen at the start of the pandemic induced recession in 2020.

Economic growth forecasts, meanwhile, have been revised downwards in all areas. After a surprise contraction in the first quarter of 2022, growth for the second quarter came in at just a seasonally adjusted annualized rate of 0.7%, down from the 3.0% forecast last month. More than one in five predicted another contraction.

GDP growth was reduced to 2.0% for this year, from 2.6% expected last month, and was cut nearly in half to 1.2% for 2023 when the full effect of interest rate hikes the Fed will be felt in the economy.

(For more stories from the Reuters Global Economic Survey:)

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Reporting by Prerana Bhat and Indradip Ghosh, polling by Susobhan Sarkar and Sarupya Ganguly; Editing by Ross Finley and Deepa Babington

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